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In the endless search for yield, a covered-call strategy can be an effective tool to supplement portfolio performance. In addition to finding returns from call premium, I'll try to incorporate higher quality dividend stocks for a little something extra. The guidelines for the covered-call strategy are:

  • Generating more than 7% per year from the calls and dividends combined is the overall goal.

  • Call should be at least 8% out of the money (OTM) to avoid being called away and to give room for underlying movement.

  • Targeted expirations will be within four months. Optimally, calls will be written on the same underlying stock 3-4 times per year.

  • Buying back calls to close before expirations takes place will be taken into account; yields are calculated bid-$0.05.

The picks should be looked upon as yield generators to supplement longer-term equity holdings. The above are only guidelines, however, not rules. Before utilizing the strategy, make sure to study it and know the potential hiccups that may occur.

Annualized Call Yield performance can be calculated as such:

= (Call premium - 0.05 /stock price)/days to expiration*365

Prices current as of October 31, 2012 market close

Summary on selection:

After a break due to the weather the stock market re-opened Wednesday. If you were lucky enough to put your hurricane trades on in time (last week) then you're sitting pretty right now. Undoubtedly some people will have a conflict making money off of the disaster, but here are some call ideas to hedge the more common bets investors have been taking.

I've included two homebuilders based on their inventories and ability to supply the repairs and rebuilding; Home Depot (HD) and Lowe's (LOW). Due to most of the buildings in NYC being older I've included a copper stock that may see demand increase from storm damage to copper pipes and copper wiring. Generators will be in demand by panicked consumers who are trying to plan ahead for the next one, so Generac (GNRC) is included below. Finally, I've chosen to include a car-rental company based on the fact that Sandy disrupted a lot of public transportation systems and flights. As always, these articles are not intended to recommend buys or sells of equities, only to target call contracts that can be used to generate income.

Hertz Global (HTZ) December 15 call

TickerHTZ
Strike15
Exp MonthDecember
Stock Price$13.27
Call Bid$0.45
Days to Expiration52
OTM13.04%
Call Yield3.01%
Annualized Call Yield21.16%
Annual Dividend Yield0.00%
Total Annual Yield21.16%

Generac (GNRC) December 35 call

This does not match any of the criteria above. However it provides a great boost in a short time. I have included the annual yield here because this is more of a short term hold opportunity.

TickerGNRC
Strike35
Exp MonthDecember
Stock Price$34.00
Call Bid$1.50
Days to Expiration52
OTM2.94%
Call Yield4.26%

Freeport McMoran (FCX) December 42 call

TickerFCX
Strike42
Exp MonthDecember
Stock Price$38.88
Call Bid$0.76
Days to Expiration52
OTM8.02%
Call Yield1.83%
Annualized Call Yield12.82%
Annual Dividend Yield3.20%
Total Annual Yield16.02%

Lowe's (LOW) December 35 call

TickerLOW
Strike35
Exp MonthDecember
Stock Price$32.38
Call Bid$0.40
Days to Expiration52
OTM8.09%
Call Yield1.08%
Annualized Call Yield7.59%
Annual Dividend Yield2.00%
Total Annual Yield9.59%

Home Depot (HD) December 65 call

TickerHD
Strike65
Exp MonthDecember
Stock Price$61.38
Call Bid$0.60
Days to Expiration52
OTM5.90%
Call Yield0.90%
Annualized Call Yield6.29%
Annual Dividend Yield1.90%
Total Annual Yield8.19%

Source: 5 Hurricane Covered Call Ideas